Chapter 6, Problem 11E

To determine

Concept Introduction:

Ratio Analysis:

Ratio analysis is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.

It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.

Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.

  $\text{Current Ratio = Current Assets / Current Liabilities}$

Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.

It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.

  $\text{Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory}$

Days Sale in Inventory − A measure of the total outstanding collections for credit sales in terms of inventory.

It is calculated to understand how many days sales in terms of inventory are available to the company.

  $\text{Days' Sale In Inventory = 365 / Inventory Turnover Ratio}$

Methods of Inventory Valuation:

Some of the inventory valuation methods are as follows:

FIFO: Stands for First In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods first purchased, i.e. the company assigns the closing inventory costs at the costs of the first purchase, since the goods purchased first are assumed to be sold first.

LIFO: Stands for Last In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods last purchased, i.e. the company assigns the closing inventory costs at the costs of the last purchase, since the goods purchased first are assumed to be sold first.

Requirement 1:

Current Ratio, Inventory Turnover Ratio and Days Sale in Inventory in Year 2

To determine

Concept Introduction:

Ratio Analysis:

Ratio analysis is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.

It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.

Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.

  $\text{Current Ratio = Current Assets / Current Liabilities}$

Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.

It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.

  $\text{Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory}$

Days Sale in Inventory − A measure of the total outstanding collections for credit sales in terms of inventory.

It is calculated to understand how many days sales in terms of inventory are available to the company.

  $\text{Days' Sale In Inventory = 365 / Inventory Turnover Ratio}$

Methods of Inventory Valuation:

Some of the inventory valuation methods are as follows:

FIFO: Stands for First In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods first purchased, i.e. the company assigns the closing inventory costs at the costs of the first purchase, since the goods purchased first are assumed to be sold first.

LIFO: Stands for Last In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods last purchased, i.e. the company assigns the closing inventory costs at the costs of the last purchase, since the goods purchased first are assumed to be sold first.

Requirement 2:

Comment on Current Ratio, Inventory Turnover Ratio and Days Sale in Inventory in Year 2